Definition of the accumulation area

What is the accumulation area?

The accumulation area on a price and volume chart is characterized by a mostly lateral movement of the share price, which investors or technical analysts consider as indicative of large institutional investors buying or accumulating a large number of shares over the course of the year. weather.

This can be contrasted with the distribution zone, where institutional investors begin to sell their shares. Being able to recognize whether a stock is in the accumulation zone or the distribution zone is helpful for successful investing. The goal is to buy in the accumulation area and sell in the distribution area.

Key takeaways

  • The accumulation area represents a period of implicit purchase of shares, usually by institutional buyers, while the price remains fairly stable.
  • In a price chart, the accumulation area is characterized by a lateral movement of the price in a volume above the average.
  • Identifying this area could help investors spot good entry points to an investment before its price begins to rise.
  • The accumulation zones can be contrasted with the distribution zones, where assets begin to be sold.

Understanding the area of ​​accumulation

It is important for investors to recognize the area of ​​accumulation when they decide to buy or sell. Experienced investors look for patterns that indicate a stock is at a high, low, or somewhere in between. The objective is to determine if the price of a stock has momentum and in what direction. A stock in the accumulation area may be about to break. When the price of a stock does not fall below a certain price level and moves in a lateral range for an extended period, this can be an indication to investors that investors are accumulating the shares and will rise as a result. early. .

The accumulation area is just one way of graphing. Charts are also used to identify what’s known as the distribution zone, which can indicate that a stock is approaching a sell-off. Investors look for divergences between stock price fluctuations and trading volumes as a key to their chart analysis.

The wide availability of online charting tools through online trading companies allows more investors to access techniques that were previously limited to professionals. These tools allow investors to look back over the years to see when stocks moved and understand what was happening at the time.

Traders seek to identify ranges of price and volume movement; a long side chart range with no major ups and downs indicates that the stock is in the accumulation area and may be about to rise.

The accumulation / distribution indicator (A / D)

Accumulation / Distribution (A / D) is a cumulative indicator that uses volume and price to assess whether a stock is accumulating or distributing. The accumulation / distribution measure seeks to identify divergences between share price and volumetric flow. This provides an idea of ​​how strong a trend is. If the price is going up but the indicator is going down, this suggests that the buying or accumulating volume may not be enough to support the price increase and a fall may be coming.

The A / D indicator is cumulative, which means that the value of one period is added to or subtracted from the last. A rising A / D line helps confirm an upward price trend, while a falling A / D line helps confirm a downtrend in price. If the price is going up but A / D is going down, it indicates an underlying weakness and a possible price drop, and vice versa.

Use of the accumulation area: advantages and disadvantages

Understanding card movements, such as those seen in the stacking area, can work well in moments of relative stability. Still, prudent investors know to pay attention to larger economic events that can quickly reshape the charts.

Two seismic economic events were the Great Depression and the Great Recession. Before the first, the market had already lost 10% during the five weeks before October 28, 1929, when it fell 13% in a single day. On that day, more than $ 14 billion worth of value was wiped from the books.

More recently, the Dow Jones Industrial Average (DJIA) peaked at 14,164.43 on October 9, 2007, only to lose half its value in just 18 months, closing at 6,594.44 on March 5, 2009.

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Mark Holland

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